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The Rent Generation’s Calling

“Generation Rent” is usually a term associated with the property market to refer to a generation of private renters who either cannot or chose not to buy.

But the term no longer exclusively applies to the property market. In fact, a recent report by Goldman Sachs suggests that 18 to 34-year-olds (millennials) place less value on the ownership of hard assets than other generations. In turn this has changed the traditional concept of ownership, for good.

Millennials have been reluctant to buy things like cars, music and movies for some time. Instead they’re turning to new types of services that provide access to products and experiences without the burden of outright ownership, giving rise to the “rent” generation.

Millennials no longer value important milestones like owning a house or vehicle, according to the report. A suitable example comes in the form of car ownership; Millennials seem to prefer the lack of constraints of car ownership and are shifting towards using service-based companies for their transportation needs such as Uber or Lyft.

While start-ups like these dominate headlines, legacy brands are not immune from the generation rent trend, MNOs (mobile network operators) in particular.

The popular subsidy plan — where a buyer gets a heavily subsidised handset after an upfront payment that is later topped up by an additional monthly fee — is losing ground with consumers.

Millennials no longer want to own their device. They want to own their data and photos, but they also want a new device as soon as it’s released. Generation Rent has given way to leasing plans where the buyer never owns the device and can return it for an upgrade after a contractual time. If MNOs can move customers to a lease model, the upgrade mentality is more important than ownership.

The OEM Threat

Apple has already capitalized on this trend with its popular iPhone Upgrade Program and it’s posing a threat to the high average revenue per user (ARPU) customers that MNOs want on their books.

Under the upgrade program, consumers don’t need to wait for the contract with their carrier to end before they change their iPhone. The program means consumers are not tied to a single carrier, don’t have to pay any early upgrade fees (as in some carrier subsidy models), and have complete freedom to choose the service provider they prefer with an unlocked iPhone on a SIM-only plan. The move means Apple can own the end-user, and the program has U.S. MNOs worried. The threat to MNOs is that Apple has begun to own the high-ARPU consumers that MNOs want and is pushing them to an unlocked, SIM-only model.

While no one carrier across Europe is combatting this well, some U.S. operators have already made a defensive play.

Enter Sprint

When the iPhone 7 launched in the U.S. this year, carriers jostled to offer the best deal. T-Mobile, Sprint and AT&T all offered a free iPhone 7 to customers turning in a recent model, but Sprint had a competitive edge.

Unlike its competitors, Sprint isn’t selling the iPhone 7s to its customers; it's leasing them via my company, Brightstar. Notably, the terms of the lease mean that Sprint gets the iPhone back at the end of the 18 month contract term. This gives Sprint an advantage over its competitors that don’t offer a lease model.

Last year Sprint told the Wall Street Journal that 51 per cent of customers who purchased a new phone in the previous quarter used its lease option, and one Wells Fargo analyst estimates Sprint is able to recover $200 per iPhone 6 and $400 for an iPhone 6s — more than other carriers due to the relationship with Brightstar. [Full disclosure: Brightstar was founded by Sprint’s current CEO, Marcelo Claure. — Ed.]

When the iPhone 7 launched, Sprint was able to maximize the value it received for those used iPhone 6 and iPhone 6s devices at the end of the lease.

In leasing alternatives like Sprint’s, the carrier offloads the handset cost burden onto a third party that acts as a financial lender, in this case Brightstar. Sprint collects monthly lease payments from subscribers and Brightstar sells returned devices via a global second-hand device market.

The success of Sprint’s leasing model in the U.S. is currently attracting considerable attention globally in both consumer and enterprise segments. It’s now a proven method for decreasing churn and increasing affordability, made possible through residual value management and the global second-hand market for smartphones.

The Capex Question

For carriers, subsidising devices as part of a phone plan has proven to be an expensive operation as it soaks up potential investment capital, even if the customer pays a higher monthly fee and is locked into a payment plan for up to two years.

Investors used to push corporate boards to focus on getting new connections/customers; now they ask how much it costs to retain a customer and what the ARPU is.

With consumer on-account and SIM-only pricing between MNOs negligible, the carriers are looking to differentiate on network superiority.

The capital expenditure (capex) challenges faced by CIOs and CTOs of carriers are significant in terms of how much and how fast to invest in the advanced networks that deliver the increased ARPU investors want to see (from data consumption). Under a leasing model, not having negative assets like the upfront cost of devices on their books is a significant benefit due the residual risk that the third party takes.

CIOs and CTOs of carriers are expected to deliver solid returns for shareholders but they have networks and IT systems to maintain, which take considerable capex. If carriers can get consumers on leasing plans where their devices are updated regularly, the move to 4G will be quicker, ensuring carriers to deliver a better experience. This then removes the need to invest as heavily in maintaining their legacy 2G and 3G systems.

Sprint’s agreement with Brightstar meant that Brightstar’s offshoot company, MLS, purchased 2.7 million handsets from Sprint at $1.1 billion, for both the future value of the leased-device payments and the residual value (worth $1.3 billion). That provided Sprint with more liquidity to invest in various aspects of its business, like building out its network.

The Millennial Question

The spending patterns of the millennial generation are important, as they will be shaping consumer demand for years to come.

To acquire new customers in the 18-34 market, carriers must offer a 12-month upgrade option so this instant gratification generation can get the latest and greatest technology on the day it’s released while the carrier can get money back for consumers’ used devices.

Sprint, the smallest of the four U.S. carriers, has noted that iPhone 7 pre-orders were five times higher compared to the 6s, and it’s possible that the uptake could continue going forward. The fact that the carrier is losing less money per iPhone 7 sign-on could explain why it’s continuing to run the promotion while its larger rivals AT&T and T-Mobile have already ended theirs.

Consumers will still sign up for a two-year phone contract, and that's great for the balance sheet of the MNO. But if you are not offering competitive leasing with early upgrade options then you risk losing market share to a competitor who will.

Cassio Calil is global head of financial services for Brightstar, a leading distributor of mobile products and related services.